Nigeria’s Election (Part I): The Country Needs Inclusive Growth

As Nigeria prepares to vote, its future is overshadowed by rising economic challenges, political divide and the threat of terror. To overcome its challenges, the nation needs inclusive growth.

On Saturday, February 14, 2015, Nigerian elections will be the most contested since the end of the military rule in 1999. For all practical purposes, the elections are a race between the incumbent People’s Democratic Party (PDP) and the incumbent President Goodluck Jonathan, a Christian who represents the southern oil-producing Niger Delta region and the east; and the main opposition coalition, the All Progressive Congress (APC) and General Muhammadu Buhari, a Muslim favored in the north and religiously mixed southwest.

The good news is that Nigeria’s economy continues to grow. With the rebasing of its GDP, it has become the largest in Africa and the 26thlargest worldwide. The bad news is that Nigeria is facing significant economic, political, ethnic and security risks.

What kind of challenges is Nigeria facing and what kind of policies should the nation’s next political leaders seize to overcome those challenges?

Eclipse of oil-fueled growth

When Goldman Sachs identified a group of potential BRIC successors a decade ago, Nigeria was the only African nation that made it into the list. The inclusion, however, was based on the country’s resource-led growth. And today, all emerging economies that rely on energy-led growth are now coping with shrinking oil revenues.

Until recently, Nigeria was a beneficiary of the global commodity boom that saw the cost of a barrel of Brent crude oil stay relatively high. In Nigeria, external forces drove success. This is why I warned some two years ago that as long as the external environment remains favorable, these forces can provide a powerful growth momentum and a cushion against adversities. But when that environment begins to fade out, uncertainty and instability step in. Russia is a textbook example.

Inadequate industrial diversification did not matter as long as Russia’s energy supply was supported by thriving world trade. But when the Great Recession caused a huge negative demand shock in the West, Russia’s growth model crumbled. And as Washington and Brussels have enacted rounds of sanctions against Moscow, Russia’s growth has plunged.

Like other oil-exporter economies, Nigeria is now coping with a steep fall in the price of oil, which accounts for some 70 percent of the nation’s fiscal revenue and over 95 percent of foreign exchange.

Since the nation did not diversify its industrial structure in good times, it must do so in far more challenging times. Neither hollow promises of change nor pledges of “law and order” will ensure lost revenues. Rather, Nigeria needs broad and deep structural reforms to support inclusive growth.

At the peak of their growth, all BRICs have demonstrated solid employment and job creation. Nigeria has not. If anything, the deterioration of labor markets has been alarming. While unemployment has shot up to 25 percent, youth unemployment hovers at 50 percent. That is a recipe to instability and decay.

Need for urgent structural reforms

In 2014, Nigeria’s real GDP grew by some 6.3 percent, supported by robust performances in the non-oil economy (agriculture, trade, and services). Inflation exceeded 8 percent. The expectation is that growth will decline to 5.8 percent next year, with inflation exceeding 10 percent.

As the ruling PDP has acknowledged the adverse implications of the plunging oil prices, Nigeria’s fiscal authorities have drafted a tighter budget for 2015, which is said to better reflect the expected medium-term developments in oil prices. The authorities have also proposed measures to increase non-oil revenue.

The International Monetary Fund (IMF) has called Nigeria’s policies “bold measures to counteract lower oil receipts, pressure on the naira, and a fall in reserves.” However, the real question is whether these policies are bold enough to contain the threats. From the IMF’s standpoint, Nigeria’s quest of macroeconomic stability is “based on assessments of credible scenarios that reflect downside risks.” That remains to be seen.

In view of the unanticipated plunge of the oil prices and the failure of the IMF to prepare for the Great Recession and its stagnation aftermath, it is only prudent to doubt whether these scenarios fully reflect downside risks – as evidenced by lower-than-expected oil receipts, ineffective efforts to prevent the devaluation of the naira, and further falls in reserves.

Clearly, the Agenda has not been moving ahead in a way President Jonathan had hoped. Only two years after the launch of his Agenda, the president sacked its creator and coordinator, Shamsudeen Usman, along with eight other cabinet ministers amid a rift in the PDP.

The Agenda objectives were formidable; the realities have been challenging. Power cuts haunt Nigerian industry. Jobs remain scarce. And poverty continues to afflict some two-thirds of Nigeria’s more than 170 million people. Nigeria’s future depends critically on industrialization and modernization.

Diversifying industrial structure

Nigeria’s longer-term challenge is to successfully put the economy on a path to lower oil-dependency and a diversified and competitive investment-driven non-oil sector.

Today, almost 70 percent of Nigeria’s labor force is still in agriculture and only 10 percent in industry. Nevertheless, industry generates more than 40 percent of the GDP, and agriculture barely 30 percent.

Like all industrializers, Nigeria needs greater productivity in agriculture and more jobs in industry and services to finish its industrial revolution.

The nation’s urbanization rate is no longer as high as it was several decades ago, but it remains more than 3 percent and the level of urbanization is still barely 50 percent. As every second

Nigerian still lives in the countryside, urban Nigeria has potential to offer significant growth potential for another decade or two.

Optimists like to stress the fact that Nigeria can benefit from youthful demographics. That’s necessary for high output potential, but not enough.

In the post-war era, both Latin America and the Middle East enjoyed favorable demographics. In the absence of jobs, the former gave rise to urban slums, whereas the latter has seen radicalization and instability.

Oil will not deliver Nigeria’s future. However, the smart use of future oil revenues could provide a timeout that Nigeria needs to accelerate industrialization, urbanization and modernization. That, in turn, requires a huge boost to Nigerian manufacturing and SMEs that create jobs.

Shrinking policy space

Nigeria’s current account surplus was projected to decline to about 2.4 percent of GDP and reserves to fall to about $35 billion at end of 2014. The magnitude of the adverse oil price shock (about 25 percent for 2015) was anticipated to sharply reduce fiscal revenues and limit fiscal spending.

Since Nigeria’s fiscal and external buffers are low, there is now far less policy space for maneuvering compared to the 2008-09 financial crisis.

In the case of adverse scenarios (read: oil prices remain at current levels), Nigeria’s growth could fall under 5 percent in 2015. Since the overall stock of debt is low, the plunging oil prices may not prevent Nigeria from paying back its debts, however.

Instead, Nigeria’s real vulnerability has more to do with the Central Bank’s (CBN) decision to deploy foreign exchange reserves to defend the overvalued currency. While the CBN’s stated goal is to tame inflation, the latter may actually rise.

Thanks to Nigeria’s high reliance on imports coupled with plunging oil revenues, the weakening of naira will make import financing challenging. After all, naira still remains close to 190 to the dollar.

If these adverse scenarios will really kick in, they could have a significant, negative impact on the delivery of social services by state and local governments. That, in turn, would erode the foundation of any enhanced transformation agenda – not to speak of strengthening human capital that Nigeria will need to complete its industrialization.

Rule of law vital for inclusive growth

Irrespective of their political systems, successful emerging economies pay increasing attention to the rule of law as their prosperity levels begin to rise.

In Nigeria, the number and scale of recent corruption scandals suggest that, despite initial efforts and stated goals, much remains to be done.

Internationally, the discontent and apprehension entered a new stage last year, when the central bank governor Lamido Sanusi was ousted after revealing that $20 billion in oil revenues were missing. That’s when international investors took a back step asking, where is Nigeria going? It certainly does not help that, at the same time, Nigeria has fallen victim to dramatic expansion of violent terrorism.

While the narratives differ, the basic story is the same. In the absence of effective rule of law, Nigeria’s potential for inclusive growth will not materialize.